As the markets were hitting new highs last week, poker player and investor Amy Calistri was contemplating the odds and plotting her course of action.

Her main questions were: “What are the chances these gains will reverse course anytime soon? And how can I position my Stock of the Month portfolio accordingly?”

Last question first…

In addressing the matter of her portfolio in her most recent issue, Amy invoked the “Kelly criterion,” a strategy devised by the physicist John Kelly Jr. in 1956. The Kelly criterion is a mathematical system of betting whereby players increase the size of their bets when the odds are in their favor. When the odds of winning are lower, bets are decreased — after all, or so the reasoning goes, as an investor (or a blackjack player), you don’t want to be scrambling for cash when the odds turn back in your favor.

That’s the strategy that that was famously employed by hedge fund manager (and blackjack player) Edward Thorp, a mathematics professor and founder of Princeton/Newport Partners. After the market dropped 23% on “Black Monday” (Oct. 19, 1987), most hedge funds were paralyzed, but Princeton/Newport had enough available cash to go on a bargain-buying spree in the days that followed. At year‘s end, Princeton/Newport was up 27%, compared with a 5% gain in the S&P 500.

Amy’s not suggesting that anything remotely like a replay of Black Monday is in the works. But when she studies the odds, Amy sees them shifting.

Each month in Stock of the Month, Amy looks to capitalize on trends the market is ignoring.

She was among the first to link a surge in business spending in late 2009 and early 2010 to the fortunes of a certain diversified tech company best known by its stock symbol: IBM. When Amy sold her holding in International Business Machines (NYSE: IBM) in January 2012, she pocketed a gain of 49.6% in less than two years. 

In late 2010 Amy took note of two trends: a disproportionate rise in the after-tax income of the wealthiest Americans and a surprising spike in jewelry sales the day after Thanksgiving. By the time Wall Street made the connection, Amy was well on her way to a 28.7% gain in Tiffany & Co. (NYSE: TIF).

This month’s insight?

“For the first time since launching my newsletter in April 2009, I believe the market is underestimating the risks of the global slowdown,” Amy wrote last week.

More than a fifth of the companies that make up the S&P 500 have already “warned” about the results they’ve started releasing this week, while only 23 have raised guidance. That’s the highest ratio of negative warnings to positive guidance since 2001.

“If the market finally starts to recognize the weak trend in the global economy and the impact that it is having on U.S. companies, I believe the odds will quickly improve for investors,” Amy said.

#-ad_banner-#Put another way: When a pullback occurs — with either the overall market or on a company-specific basis — have enough cash on hand to pick up some bargains.

To assist in that pursuit, I asked the StreetAuthority stock market strategists, including Amy, to name the first one of their portfolio holdings they would buy more of if prices suddenly “corrected” by 10%.

We’ll start with Amy’s take in this article. In subsequent parts to this series, we’ll offer the perspectives of our top income specialists, aggressive growth investors — even our top options expert.

But first, more from Amy…

As you noted above, I launched my Stock of the Month newsletter in February 2009. To most people, it seemed like an insane time to discuss a new investment advisory. In the prior six months, the S&P 500 index had dropped roughly 40%, and investors were leaving the market faster than the speed of light. But where they saw fear, I saw better investment odds. Securities were priced for worst-case scenarios. And I saw so many companies where the worst was never going to happen.

In the past three months, however, the market has started to price securities for perfection. When I look at global economic conditions, I see a lot of companies that could have trouble delivering perfection.

The unemployment rate in the eurozone was 12% in March, a record high. Industrial production is continuing to contract in Europe. Japan’s economy has been flatlining for the better part of a year, and the Bank of Japan has just taken drastic measures to try to jump start it. Many global economies and currencies are weakening, and I think that is going to be a bigger issue for U.S. multinational companies than the market realizes. As a result, I’ve been starting to keep more cash in my portfolio. I want dry powder to invest when my investment odds are better.

I’d love the chance to buy more shares of warehouse retailer Costco (Nasdaq: COST) on a pullback. Costco is in the retailing sweet spot. In challenging economic times, it attracts new consumers looking to save money. But as the economy improves, its new consumers become loyal customers who have come to value Costco’s ability to deliver high-quality products at a discount price.

I also like Costco’s regional concentration right now. More than 90% of Costco’s 618 locations are in North America, with the vast majority in the United States. This reduces the company’s exposure to foreign currency risk and weaker international demand.

The company has been performing well — in fiscal 2012, the company grew net income per share by 17.9% over 2011. Revenues grew 11.5% during the same period.

Costco also offers a variety of services to its members, and those offerings are expanding. The retailer has partnered with the health insurance provider Aetna (NYSE: AET) to sell health insurance for individuals. Costco-Aetna health plans offer medical benefits and dental options.

You can even refinance your mortgage through Costco. After running a successful pilot program, Costco is rolling out its full-service mortgage services to members. So far, 11 banks and lending institutions have partnered with Costco on this venture.

Costco spends time and money to make sure its members are getting high quality for a good price. The trust it has built with its customer base will be a nice tailwind for Costco’s new services.

P.S. — Amy has one objective for readers of Stock of the Month… to provide one quality stock pick each month, with in-depth analysis in plain English that investors can understand. In fact, she just released a special presentation, “How to Beat the Stock Market… In Just 12 Minutes per Month,” which tells you more about her strategy.